Friday, March 05, 2010

A Glass-Steagall for Europe: Outlaw Currency Speculation

Feb. 2—Imagine the scene: A bank director invites a gang of bandits in, and gives them the keys and security codes to the bank's branches. The bandits proceed to rob those branches. The bank director then demands that the customers on the receiving end not only accept the losses and pay damages to the bank, but also pay for the bandits' expenses, while he himself continues to give them tips on how to bet on the likely insolvency of those customers and, in expectation of their premature death, how to make a profit on their life insurance.

Those who invited hedge funds into Germany in 2004, and who are now passively watching those same funds speculate not only against Greece, but on the collapse of the euro, while demanding that the taxpayers cover the losses, and that the citizens tighten their belts, have a striking similarity to that bank director. Germany has truly fallen prey to the bandits.

In order to prevent a chaotic collapse of the euro, with catastrophic consequences for the real economy and living standards, governments in Europe must immediately implement a Glass-Steagall standard, i.e., set up a strict firewall between commercial banks and investment banks. Speculation by financial holding companies, hedge funds, private equity funds, etc., must be totally separated from the savings and lending activities of commercial banks. Should financial institutions engaged in high-risk operations make the wrong bets, they will have to face the music themselves. Taxpayers should no longer be expected to cover the debts of professional gamblers.

Should it prove impossible to establish fixed exchange rates in the short term, we will have to penalize currency speculation immediately. It is unacceptable to have "all-star" managers of the largest hedge funds decide, over a private dinner in Manhattan, to speculate on a collapse of the euro down to a 1:1 parity with the dollar, which would slash, by a quarter or a third, the economic wealth of those people who have the misfortune of living in the Eurozone.

The Federal government is urgently called upon to protect the German people from harm—as their oath of office states—by introducing the Glass-Steagall standard and by prohibiting currency speculation. If Chancellor Merkel, who has apparently noticed for the first time that the euro is in a difficult situation, is really concerned with ensuring a sustainable budget, this is the problem to be eradicated…